Retirement: Myths & realities

Written by Abhay Rao | Updated: Jun 29 2009, 04:31am hrs
Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money. - Jonathan Clements

Every retirement product advertisement seen seems to emotionally urge the middle aged to start planning for retirement early, for while the old couple walking in the park look cute, the car substituted by a bus ride home, doesn't have the same appeal to it. On the other hand, the idea of doing nothing all day and having the money to support doing nothing does seem to put a smile on many a face. Retirement planning is no rocket science, it's no one product miracle. In fact, it is something that one can very easily and consciously make a part of our lives. The trick is avoiding some of the most common and human errors one tends to make, whenever dealing with something far into the future or something that one feels will not really be an issue to them.

While people have done wonderfully post retirement, some have started businesses and others have followed their dreams, there have been an equal number of cases wherein people have been suddenly left with little or no support and the stark reality of old age and expenses to live through. The main difference between the two circumstances was simply retirement/financial planning. After all, very little can take precedence over planning for the future, that too, the future, which may see you without a steady income or job.

Sujit Ganguli, head, marketing and senior vice president, ICICI Prudential Life Insurance tells us, "One must realise that retirement planning is one of the most important parts of financial planning in a person's life. Generally, retirement plans being a part of the future tend to take a back seat when it comes to money management. Most people are more focussed on short-term goals and expenses like buying cars, electronics, spending on weddings, college expenses, etc"

Myths

You need a large income to be prepared for retirement

Shinde has worked as a railway officer in the Indian Railways for the past 35 years. With a modest income and big dreams of sending his kids to study where they want, it was the small steps that helped him realise his dreams. Saving a simple Rs 10,000 a year and investing it in a good retirement and pension plan, saw Shinde, with compounded interest, get a nest egg of about Rs 23 lakh post retirement, which not only helped him save enough for his kids but also enabled him to buy a couple of flats in the upcoming suburbs, which he rents out for a monthly income of Rs 10,000. This clearly shows that one does not need to have a large income to be prepared for retirement; one must need to be disciplined and start saving early.

Debt is a part of life

While Indians by and large stayed clear of debt due to horror stories passed on from generation to generation about money lenders, in recent years, credit cards and loans have become a common things amongst people. The most popular and largest loan that people tend to take is a home loan, and of course, credit cards, which for many are an addiction, while for the smart just a tool with consequences. The notion that paying off ones EMI on a home loan or other loan, expenses, credit card bills and saving for retirement is not practical, the reality is that by keeping one's expenses in check and having preferably just one loan or debt to take care of in the last few years before retirement, one can easily plan their finances in such a way that either just before or at retirement, one should have enough money to clear their last debt and have plenty more to survive on. Having debt to take care of when retired is not prudent, and, it is not something everyone has if they plan ahead.

Assuming your kids are your retirement plan

Ganguli feels people keep saying, "My retirement plan is my children. This may have been the case at one point of time but does not hold true anymore, especially with nuclear families gaining popularity. Also, many times ones kids may shift abroad and move to different parts of the world, making it impractical for them to remain one's support system." Earlier, when joint families were the norm and the entire family lived together, the children looking after and taking care of all the needs was a given. However, these days there are no such guarantees in life, and, while one may feel that they are okay being dependent, in reality no one is.

Your house can finance retirement

Treating your house as the ultimate retirement insurance is an easy trap to fall into. This is as firstly your house is your biggest asset class and takes up over 50% of most people's net worth, and secondly shifting houses at an later age may not be the easiest adjustment to make, especially if it is to a cheaper and smaller place. This is as in reality it's hard to eat out on your home equity. You have to live somewhere. To turn your equity into cash, you can sell and then rent, move to a cheaper area or downsize. Most retirees prefer to stay put. Yes, you can do what a small but growing number of retirees are doing. Taking out a reverse mortgage, which is a new and emerging product, which is basically a loan against your house, which you do not have to pay back, is one option available. The loan is repayed by the bank selling your house once you die or, allowing your heirs to pay back the loan and keep the house. However, majority of the times these loans are given for a way lesser value than the actual worth and this often causes hassles.

The best way to look at your house is as a place to live, not a retirement account. So in the years leading up to retirement, don't over invest in it with the idea that you can get that money out later. Keep your EMI and other housing expenses to no more than 30% of your income, and don't prepay your loan instead of saving for retirement. Ganguli adds, "Reverse mortgage is a fairly new concept in India and everyone is not yet fully aware about it. While the idea is good, one of the major hurdles I feel it faces is a lack of having a uniform method of valuing property as an asset. It could do so much better if the lack of transparency was not as issue. Also, another hurdle in India is that it is a big emotional and psychological feeling amongst people, to leave behind their property for their children. Reverse mortgage is a good concept, but it has too many blockers as of now."

I wont live long after retirement

This is probably one of the most common myths and it is high time people get realistic about it.

You don't know how long you will live post retirement and that's a fact. The life expectancy in India is improving. In fact, you may well live up to 80 or 85 years, if not beyond. So, even if you retire when you are 60 years old, you still have to provide for the balance 20 to 25 years, and, if you wish to retire sooner, than the longer you have to account for. Ganguli felt, "People usually assume and feel that post retirement one will live only another 10-15 years. However, with people retiring earlier now-a-days and living longer, since medical advances have been made, one's post retirement life span could be up to 30 years."

I will never retire.

Yes, you will. Everybody has to. You may want to work till you drop dead, but what if you really cannot get a job after 55 What if your health does not permit you to work

Also, what makes you so sure you will want to work at that time Maybe, you will get sick of working on want a break, may be you will want a permanent break because your sick of waking up to an alarm clock. It's easy to make such assumptions when work is all consuming and important to us. However, being more mature about this eventuality of retirement will only ease the burden later on. Retirement planning is about saving sufficient amounts of money to give yourself the option of stepping back from your working life. Be it if you want to run your own business before or at retirement, which will keep the money rolling or if you want to remain hands on and keep working is an option you can take only if you've planned for these later years.

I am too young to plan for retirement

There is no such thing as being too young to retire or plan for retirement. The earlier one starts the better. Ganguli, who feels strongly on the topic adds, "One should start early as possible when it comes to retirement planning. The main advantage of starting early is that you can make the most of the power of compounding, which makes a big difference. Say you start investing for your retirement at 25 years, and you invest Rs 20,000 for 35 years. That will be a total investment of Rs 7 lakh by the time you reach 60. This money, when compounded for the period will amount to Rs 45 lakh. Similarly, at 35 if you start planning for retirement and save upto Rs 10 lakh by the time your 60, the amount will be Rs 35 lakh only. This clearly shows the impact that compounding has on retirement planning." The power of compounding here clearly urges one to start planning sooner and faster for retirement, so as to make the most out of the time they have before retirement to build a large nest egg for the future.

Retirement planning can wait till my loans are paid and goals met

It never works like that. Once your loans are repaid, you will have other goals for which you are saving. Your home, a holiday, children's education and marriage, the list can go on and on. Keep retirement as a constant goal that never changes. You may find yourself facing periods in time when you are barely putting any amount in your retirement savings fund, which is still better than not having one or putting nothing in it. Retirement planning is a part of financial planning and while we may have many short and medium term goal's to look after, it does not mean the most important long-term goal should be ignored under any circumstances.

Retirement money should stay clear of equity

This is another big mistake that many people make while planning for retirement. Equity, while being a riskier asset class over the long run, has always provided way better returns than fixed income instruments. Ignoring this asset class in your retirement plan is folly, as this will help you beat inflation and gain the most out of your savings. While traditionally a public provident fund is the most suited for retirement saving, along with long-term bonds, equities should be a key ingredient as well, if one wishes to get higher returns and stay higher than the level of inflation. Ganguli says, "Another common mistake people tend to make is that they put their money in a single asset class. Usually, with safety being the primary focus, fixed income products take preference. However, one must realise that the returns provided only by this asset class may or may not just about beat inflation. Hence, choosing an instrument that gives you a mixture of equity, debt, property, gold or whichever asset classes you wish to expose yourself too is better, as it will give you better returns, especially in the long run." He also feels sometimes people post retirement put their money in a short-term instrument, and once that matures they end up using up the money rather than making it last.

My needs post retirement will be limited

This is a myth and a completely baseless statement unless calculated by you or your financial planner. Ganguli explains as far as the calculations go, "Judging how much money one needs post retirement is never easy and one of the best ways to do is by figuring out what expenses you'll have then. This can be done by looking at your current expenses, and, seeing what part of it you will need when you're retired. For example, if you have a loan now and EMI is an expense, it may not remain so when you retire, or say expenses on children, etc. Similarly, on the other hand, medical expenses will become more, maybe other expenses like buying gifts for grandchildren, plus the cost of inflation shall have to be considered as well. Inflation does play a major role in retirement expenses, as, if you're relevant expenses are say, Rs 25,000 per month today and your 40 years old, in another 20 years when your 60, at inflation at 6% per year, your expenses will shoot up to Rs 80,000 a month. And, by the time you are 70 it would be around Rs 1,40,000! So assuming that your calculations project you needing Rs 1 lakh per month post retirement, the best way to achieve this target is by planning for it and starting to put away money for it, from now itself. Start planning right away, as the sooner the better. Also, one should select a retire plan and service provider very carefully. One must trust the service provider to be there to facilitate you for the next 30-40 years and then select the right plan from that company."

This is by far the most common mistake people make when dealing with retirement planning, assuming that their needs and wants will be limited. The fact is that post retirement one may want to do a lot more than one realises and spend less frugally than before when it comes to spending on grandchildren or even travelling for that matter.

Policy buying tips

"The key points that go into selecting the ideal retirement plan are, looking at the company and selecting carefully a company you trust and that you feel will go the distance. One should look at the charges that are applicable along with the retirement plan and select a plan where the charges are not very high. One should also look at the funds available for investment and go for the right fund mix. Also, lastly, one should be careful to try and use the retirement money for maintaining the lifestyle you desire and not for paying medical bills. This is as a good medical plan is essential to have in place, which should take care of most of the medical expenses one may incur," concludes Ganguli.

All in all, retirement is something that will happen to us all and like taxes and death is inevitable. Planning ahead will only make these years so much more fruitful and fun, and can save oneself from a lot of unnecessary hardships, which one does not and should not need to deal with at 60 or 65.